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The Odds of A Yellen Rate Hike

I love Las Vegas! While I enjoy playing cards, I don’t really like throwing money away gambling on slots, rolling the dice, or even spinning a roulette wheel.

Blackjack is fun, but casinos have cut the odds too deeply in their favor with multiple decks of cards and automatic shuffling machines. That’s why, when I’m visiting Vegas, you’ll find me at the poker table.

Odds makers look at known variables to calculate the probability of a winning hand. I analyze my cards, the other players at the table, and determine whether to bet on a particular hand… or whether I can bluff the other players. Poker is a game of skill, but some luck pulling cards will increase the odds of winning.

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Investors are surely interested in what the Fed will do and how Fed actions could affect investment returns. So, investors are the odds makers and their investments are their bets.

The market is always handicapping the probability of future Fed action. The odds change as the data changes.

Fed Chair Janet Yellen spoke earlier this week and gave us her final update before the Fed meets next week. Thankfully, there is a media blackout and we won’t hear from her or any other Fed members until after the fact next Wednesday!

The Fed is most concerned with employment and inflation because of their congressional dual mandate. They are concerned with wage growth along with employment, since it directly impacts consumer spending and spending is closely tied to inflation.

Last month, jobs created were a disappointment, but wages grew faster than expected. This jobs number was a huge disappointment, growing jobs by a measly 38,000 on the expectation of 158,000.

The rate of unemployment dropped to 4.7% because nearly a half million people are no longer considered technically “unemployed.” In order to be considered unemployed, you have to be out of work but also actively seeking it. So if you stop looking for a job… you’re no longer unemployed.

The bright spot of the report was that wages grew 0.2% as expected. The unemployment rate is falling and wages are rising, but new job creation is definitely slowing. In other words, employment is still a mixed bag for the Fed.

Janet Yellen cautioned that the weak jobs report was concerning, but maybe an outlier and that the wage growth was promising. So for now, the positives outweigh the negatives.

April’s Personal Income and Outlays data was pretty good. Personal income rose 0.4% as expected and consumer spending rose 1.0%, which surpassed expectations.

The Fed’s most important gauge of inflation also moved higher as expected, with the core PCE price index up 0.2% on the month and 1.6% for the year.

Overall, the Fed should be pleased despite the fact that its 2.0% target has not yet been met. Yellen says she’s confident we’ll reach her 2.0% target within “the next couple years.”

April retail sales were reported up 1.3% and, excluding autos, they were up 0.6%. Both figures were much stronger than expected. Again, Yellen stressed the positive here.

I’ve mentioned numerous times how vital new home sales are to the economy because of the multiplier effect it has with sales and employment in related sectors like appliances, furniture, etc.

April new home sales blazed higher by 16.6% and the median price was up 7.8% to $321,000! Janet Yellen underscored how that has helped individual consumer wealth, at least for those who own homes.

Manufacturing has been a weak component of our economy for months and weak energy prices haven’t helped. Earlier this week, May Institute for Supply Management’s (ISM) Manufacturing Index was a little stronger than expected, which maybe gives the Fed a little hope. Yellen didn’t specifically mention manufacturing but did mention persistently disappointing productivity output.

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April construction spending was off by 1.8% and was the weakest in nearly two years. Residential construction was up, mirroring strong new home sales, but manufacturing construction spending was off by 10% and the weakest component.

So in the last month or so, the data has been improving, with the exception of job creation. The first quarter of the year has been a stinker for corporate earnings, and GDP was only up 0.8%.

The Fed Chair also mentioned the weak GDP, but since the quarter-to-quarter figures can be quite volatile, she seemed to dismiss it as another outlier.

After all of the Fed fist-pounding insistence of a possible rate hike over the last couple weeks, the jobs report – and then Chair Yellen herself – put a damper on those expectations.

According to Bloomberg, the odds of a rate hike in June moved from 2% to 0%! The odds of a rate hike by December, however, is at about 50%.

So for now, don’t bet on a rate hike any time soon!

Whatever the Fed does or doesn’t do, doesn’t really matter. Overreaction to what they might do affects prices and yields in long-term Treasury bonds and is one way TreasuryProfit Accelerator subscriber’s profit.

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis.
After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.